In Keymed (Medical & Industrial Equipment) Limited v Hillman and others, Justice Marcus Smith provided a useful and concise analysis of the duties owed by directors, and the issue of conflict of interest in fiduciary relationships. In particular, he answered the question of whether a trustee of a pension scheme owes a fiduciary or equitable duty to the employer sponsoring the scheme: an issue on which there was previously no direct authority in English Law. His analysis will be relevant to offshore structures where fiduciaries act as common trustees, or directors of related entities.
KeyMed alleged that Mr Hillman and Mr Woodford acted both in breach of their duties as directors of KeyMed and in breach of their duties owed as trustees of the pension scheme to KeyMed in relation to the establishment and subsequent management and administration of an executive and a staff pension scheme. In particular, it was said that as trustees, the defendants had adopted investment and funding approaches that caused KeyMed to make greater contributions than would otherwise be the case, and failed to take proper account of the interests of KeyMed, for the improper purpose of improving the defendants’ own personal position as members of the executive pension scheme.
Keymed contended that because a trustee of a pension scheme was, in certain cases, obliged to consider the employer’s interests, it follows that a trustee owes a duty to the employer to take its interests into account.
Justice Marcus Smith disagreed. In his judgment:
- The duty of a trustee to act in the beneficiaries’ best interests cannot be separated from the proper purpose of the trust itself: The trustee’s obligation is to promote the purpose for which the trust was created.
- By way of example, if the trustee’s obligation is to ensure that an employer’s contributions are at the level necessary to provide the benefits under the scheme, the employer’s interests may be relevant. The trustees would be likely to be concerned not to prejudice the employer’s covenant to contribute by imposing obligations that might overstretch it. However, in such a situation, the trustees would in fact be balancing different interests of the members of the scheme: as regards seeking higher contributions now (having the money in hand, with the risk of the employer’s insolvency) versus seeking lower contributions now (protecting the employer’s covenant, but running the risk of a deficiency).
- The divided loyalty of a trustee – owing duties to both the beneficiaries of a scheme and to the employer - is “profoundly undesirable”. A fiduciary should serve only one master. A fiduciary can only serve two masters if he has first obtained the informed consent of both, and even then that will not absolve the fiduciary from liability if he cannot properly discharge duties because of conflicting duties owed to the other. “Despite the courts’ inveighings against fiduciaries acting “two ways” … the practice remains a common one occurring not only in agency transactions but also in dealings for example: between trusts sharing common trustees and between companies having common board members”: Finn, Fiduciary Obligations 1st Edn 1977at .
- The defendants - as directors of KeyMed and as trustees of the executive and staff pension schemes - might be said to serve three masters. However, it is not arguable that as a general proposition the law will impose a duty that will create a conflict of interest fundamental to the manner in which the trustee of a scheme carries out his or her duties. Whilst such conflicts may arise, the law should not go out of its way to create them.
- Provided that the trustees have regard to their primary purpose and do not subordinate it to other interests, they are entitled to have regard to the employer’s interests even if the protecting of those interests is a matter of indifference to the beneficiaries of the scheme. If the employer’s interests conflict with those of the beneficiaries, the trustee’s course is clear. The employer’s interests are subordinate to those of the beneficiaries of the trust.
- Taking account of employer’s interests does not involve any kind of conflict of interest: the employer’s interests are only relevant if they do not conflict with the trustee’s primary duty. Provided that the primary duty that a trustee owes to the beneficiaries is respected, it is not improper to consider other interests.
These statements of principle provide a useful checklist for fiduciaries acting in structures where the potential for conflicts of interest may often arise.
Bridget A Lucas QC
Fountain Court Chambers